European car market rebound on track, but discounting persists

MILAN -- Western Europe's 7 percent first-quarter rise in new-car sales has some market watchers adjusting their full-year forecasts upward while others are more cautious.

The consensus among automaker executives and analysts is that the recovery is underway but economic risks remain and profit-robbing car discounting continues.

Mass-market automakers such as Ford Motor, General Motors' Opel, Fiat and PSA/Peugeot Citroen have combined to lose billions of euros annually in Europe during the region's six-year slump in new-car sales. They got some relief as customers started returning to showrooms in the first quarter.

"The recovery seems to be on track," Ian Fletcher, a senior analyst at IHS Automotive, said. "It bodes well for those carmakers that are targeting a return to profit in Europe for 2015 or 2016."

IHS is sticking to its 2.4 percent sales increase for 2014 for western Europe. Meanwhile, strong March sales in the UK prompted consultancy LMC Automotive to increase its growth forecast for western Europe to 3.5 percent for the full year, from 2.5 percent at the start of the year.

Forecasters point out, however, that the recovery is weak, and patchy. The EU economy is seen growing 1.5 percent this year, compared with 2.6 percent in the United States.

In southern Europe, record unemployment in Italy and Spain means that the economy isn't strong enough yet for people to feel secure about making a monthly payment on a new car, forecasters said. That means carmakers in southern Europe are still offering deep discounts, according to reports. Rebates and other incentives are also prevalent in Germany, Europe's largest market.

Moreover, this year's bounce takes place in a market where about 4 million fewer cars are sold annually than at the 2007 pre-crisis peak. European car sales in 2013, including central and eastern Europe, were 12.3 million, according to ACEA, compared with about 16 million in 2007.

"The year-on-year comparison is still very weak," Jonathon Poskitt, head of sales forecasting for Europe at LMC Automotive, said. "What's critical is how these economies move into recovery mode going forward and how they deal with unemployment."

On the rise

Q1 sales in Europe's top 5 markets; increase from Q1 2013

1. Germany 711,753 6%

2. UK 688,122 14%

3. France 446,648 3%

4. Italy 375,467 6%

5. Spain 202,128 12%

Source: LMC Automotive

UK's March surprise

UK car sales in March rose 18 percent, a surprisingly big increase even for a month known for spikes because of the annual registration plate change. The strongest car sales in a decade in Europe’s second-largest market were also driven by declining inflation, discounts, financing plans and growing consumer confidence. A booming housing market and wage hikes also helped, said EY analyst Anil Valsan.

"We expect the [UK] market to report a moderate growth in 2014 and close the year around the pre-recessionary level of 2.4 million units" seen in 2007, Valsan said in a note to investors.

Elsewhere in Europe, carmakers were still forced to offer the deep discounts that have ravaged their balance sheets, analysts said.

In Germany the 6 percent growth in the quarter was driven by a "significant proportion" of deeply discounted demonstration vehicles, according to LMC, "which highlights that even in the largest market in Europe … significant incentives are still required." Germans bought 2.95 million cars last year.

"Heavy incentivization is still in place across western Europe," added LMC’s Poskitt. "Until that eases, it will put pressure on profit margins."

Since demand is weak in relation to manufacturing capacity, car dealers have been forced to offer discounts. On average, they are cutting sticker prices by 11 percent to 12 percent, automaker sources told Automotive News Europe earlier this year.

"The price war has not eased yet, we continue to see very aggressive pricing on existing models as well as very aggressive positioning of new products," Ford of Europe Chief Operating Officer Barb Samardzich told Automotive News Europe.

Volvo CEO Hakan Samuelsson said the price war in Europe is "a bit better" but he added that "due to the pricing issues, this is not the year to try to take market share."

France, Europe's third-largest market with 1.79 million units sold last year, managed just a 3 percent increase in car sales for the quarter. Its recovery has been a stop-and-start affair, with car sales jumping 9 percent in December, only to stagnate in January and February.

Spanish car sales rose 11 percent in the quarter, continuing to benefit from a scrappage scheme that was extended for a fourth time in January 2014.

Southern Europe's recovery should be taken in context. Car sales in Spain and Italy have fallen about 50 percent from the first quarter of 2007, before the start of the financial crisis, analysts said.

"Pricing across Europe has been damaged by the crisis but it seems Italy is worse than most," wrote Bernstein Research in an April 7 note after a trip through Italy. Bernstein estimates that about 30 percent of cars sold each month in Italy are so-called "pre-registrations," or cars without customers that registered, and then sold as used.

Italy, Europe's fourth-largest market, saw car sales rise 6 percent in the quarter, said manufacturers’ trade group ANFIA. To avoid a bailout like Spain and Portugal, Italy’s government has been forced to cut spending and raise taxes, upping the taxes on gasoline for the 10th time in the past five years.

"In a nutshell, even though they buy fewer cars and drive them less, Italian car owners are paying more," ANFIA said in a statement.